For a long time now, the practice of product pricing has involved more art than science, with product managers and sales professionals governed mostly by what "felt right." In recent years, however, science has started to gain the upper hand, and the sun may be setting on the era of "pricing by the gut."

In manufacturers' never-ending quest to turn over every stone that may yield better profits and allay the pressures of a bustling global marketplace, the list of strategies is long and growing: business-spanning ERP systems, lean manufacturing, collaborative networks that tie in partners across the supply chain, and outsourced labor, to name a few. An item that only recently made the list is one that seems the most obvious, at least in retrospect: pricing science.

Few variables have a more direct impact on a company's profit than the price at which it sells its products. Traditionally, executives and sales managers viewed the pricing for their products as something of a free-for-all. Since pricing depended on so many unpredictable moving parts, it was best left in the hands of the sales team — the folks with the best read on the prospective customer.

And yet, variables that may be too numerous and complex for the average person to process and analyze are a cinch for today's computer processors, working in conjunction with the right software-based algorithms. And so with the dawn of the new millennium came the dawn of a new niche in enterprise applications — pricing management.

With few exceptions, today's crop of pricing software providers began operations within a year or two of the turn of the century. Many have their roots in California's Silicon Valley, where entrepreneurs steeped in supply chain and customer interaction applications saw a new opportunity to apply advanced analytics to product pricing.

The fraternity includes Metreo, which was founded in 2000 and merged with Symphony in 2007; Model N, which began in 1999 and focuses more broadly on revenue management; pVelocity, a Canadian company founded 2001; Vendavo, founded in 2000; Vistaar, which began operations in 2001; and Zilliant, founded in 1999. SignalDemand, an upstart among upstarts, emerged from Silicon Valley in 2004 with an on-demand software model that has earned it a solid base of customers. The wily veteran of the market is PROS, which traces its roots to 1985 and operates out of global headquarters in Houston.

The larger enterprise software vendors have taken notice of this growing area of interest. SAP in 2005 tapped into its vast partner ecosystem to resell software from one of the market leaders, offering SAP Price and Margin Management by Vendavo.

SAP's main rival, Oracle, is navigating a tried-and-true acquisition path, having bought pricing specialist Revenue Technologies in 2007.

"Oracle's strategy is to deliver by 2009 modules under the price management brand that address price analytics, price optimization, and price execution functions for E-Business Suite and Siebel," wrote Gartner analyst Michael Dunne in a recent research note.

Research by consulting firm Deloitte shows that using price management software to buttress change management efforts can have a substantial payoff.

In a 2006 research paper titled, "The Pricing Myths that Could Be Holding Back Your Profit," Deloitte's Laura Preslan and Ranjit Singh describe a Fortune 50 consumer goods maker that created target sales prices for each product — only to have them ignored by the sales force. When their requests for pricing discounts were denied, the salespeople would simply dip into trade promotion allotments to make up the difference and cut the price. Researchers said the practice led to a 6% year-over-year drop in profitability.

Preslan and Singh cite an industrial manufacturing company whose market research showed a 50% price variance for the same product in a certain region and among the same competitors. The company issued new pricing guidelines to its staff and raised its price 12%. "This improvement resulted in more than $19 million in benefits while driving a 1% increase in year-over-year volume," they write.

Manufacturers that take advantage of price management software can reap 10% to 20% margin improvements and a 3% to 10% bump in revenue, according to Noha Tohamy, research director of AMR Research.

Although the science behind the software can make for impressive revenue and margin improvements, an investment in price management technology does not come cheap. According to Tohamy, the up-front investment in pricing software is "typically upward of $1 million."

In recent months, Tohamy notes, that figure has given manufacturers pause, as the weak economy shrinks sales and management scrutinizes capital expenditures more assiduously. Yet, when higher material and labor costs paint manufacturers into a corner, pricing "might be the only lever to improve profitability," she says. "In the down economy, there's more motivation for user companies to really understand how they're pricing."

In a summary accompanying her research report, "Pricing Optimization in a Down Economy: Mandate for Growth or Ill-Timed Choice?" Tohamy writes, "In an economic slowdown, establishing fact-based pricing helps sales organizations maximize margin realization in every transaction."

Schneider Electric is one company that did not wait for economic weakness or a constricting market to kick-start its pricing strategy. The maker of automation systems and the popular Telemecanique and Square D electrical products installed a centralized pricing department in its North American operating division more than 20 years ago, says Neal Lyons, who heads the unit today.

Even before the advent of specialized pricing software, Schneider's 40-person team of pricing specialists practiced the three tenets of price management: analyzing pricing policies against market data and internal intelligence, optimizing product prices based on those analytics, and enforcing the optimized prices through sales force management practices.

Not long after the new wave of price management software emerged earlier this decade, Schneider North America sought out the technology. In 2006, Schneider selected Zilliant's Precision Pricing Suite and rolled out the software in just six months.

"We went too fast," Lyons admits. In their haste to use Zilliant's Analytics and Optimization modules to assess their pricing methods and determine the optimal price for products, the team included some erroneous data and insight. Revising the data models pushed the project back half a year.

"We should have tested some of these models," he says. "My advice would be [to] do all that up front. Don't rush to push it out."

With the data models cleaned up, Schneider North America began to use Zilliant's Deal Manager module, which analyzes historical pricing information, including job size, project type, and geographic territory, to determine the best price for a salesperson to quote.

Schneider's North America sales force quotes 600,000 electrical equipment jobs every year. To initiate the process, they enter information pertaining to the job in the Quote to Cash system by Sybase. To keep from drowning Lyons' team in pricing requests, sales personnel can choose an "auto-negotiate" function. The system checks the proposed price against preset parameters and issues a go/no-go response.

The Deal Manager software enhances that exchange by furnishing an alternate, optimized price. For smaller jobs — which comprise 400,000 of the annual total — acceptance of the optimized price has steadily risen, he says, to a 50% acceptance rate. "That's a big deal because it makes the whole field sales more efficient; they're more confident in the price they have."

Doug Woodside, a pricing specialist in Lyons' department, uses Zilliant upwards of 50 times each day. Before the software was installed, he and his colleagues in the pricing department negotiated with the sales force within Quote to Cash. "You just looked at it, saw what it was ... we didn't have any of the inherent information that Zilliant is giving us," he says.

"We can see where the request is priced on a national scale, on a job-size scale," he says. "There's an analytics piece to it that allows you to get really deep if you want or need to."

As to the balance of art and science, Woodside says, the scales may be tipping toward the latter. "I think we still go with our gut, but I think the science that [Deal Manager] gives us allows us to either validate it or give us a reason to deviate," he says. The software can "bring us back down to earth and give us the non-emotional facts to analyze."

Of course, pricing is only as good as the corporate culture that enforces it. "One of the things that the rest of [Schneider's] countries don't understand is the ability to say 'no' to field sales," Lyons says.

Sound pricing analytics and optimization depend mainly on science, but enforcement may still be more art than companies would like to admit.

Next up for Schneider North America is to assess salespeople's adherence to the target prices. "As we go through '08, we're going to start looking at ... how our sales force measures up against the Zilliant target, and prove that the more you adhere to this, the more successful you are with top line and margin," Lyons says. Tying target price attainment to sales incentives would be ideal, he says, though he has yet to make that case to management.

Though Lyons calls the implementation of price management software a resounding success, he admits it was a slow and daunting process. "It is not easy to implement something like this," he says. His advice for those undertaking the journey: Assign a full-time project manager and a full-time change agent to the rollout.

Battle of Heavyweights?

The experience of global giant Schneider, combined with the hefty price tag for price management applications, may have some manufacturers of slighter build questioning the software's relevance to them.

AMR's Tohamy says the benefits of using price management strategies grow with the complexity of the business. Generally, only manufacturers with a high volume of products have data sets large enough for pricing software to work its comparative magic.

Though the emergence of SaaS software from SignalDemand, in particular, may offer small and mid-sized manufacturers a foot in the door, the on-demand model's Achilles heel — a reluctance to leave sensitive data in someone else's care — may be heightened when it comes to highly confidential pricing information, Tohamy says.

Still, the pricing market shows signs of strength, even in its infancy. PROS, the market pioneer, went public in 2007. And Vendavo's reseller partnership with SAP has given the company a credibility boost among potential customers, Tohamy says. SignalDemand's ability to raise $20 million in a recent round of venture capital financing also bodes well, she says. "I think right now most people would agree that there is enough upside and enough opportunity that at least a handful of the vendors" will survive and thrive, she says.

Schneider's Woodside says pricing tools have given him a more informed perspective. "I have a baseline of information that's more than I had before, and then if I choose to dig deeper, I can go get mounds and mounds of information to support what I'm looking for," he says. "I think information is king."